Ally Financial (ALLY) Earnings Preview: Credit Challenges in Focus as Delinquencies Rise
Investors are gearing up for Ally Financial’s third-quarter earnings report, scheduled for Friday’s pre-market session. The spotlight will be on the company’s ongoing battle with rising credit challenges, particularly in its core retail auto lending segment.
In September, Ally’s CFO, Russell Hutchinson, revealed at a New York conference that the company is facing a more difficult lending environment than anticipated. Borrowers are struggling, leading to a surge in delinquencies and net charge-offs that outpace initial projections. This trend has sparked concerns about how these headwinds might have impacted Ally’s financial performance in the third quarter.
A Look Back: Mixed Results in Q2
Ally’s second-quarter earnings painted a mixed picture. While total revenue reached $2.08 billion, down a modest 1.6% year-over-year, net income plunged by 58% to $327 million. The primary culprit for this decline was the significant jump in loan losses and provisions for credit losses, reaching $490 million. This increase was directly tied to the growing number of borrowers struggling to make their payments.
Another key metric, Ally’s net interest margin (NIM), which measures profitability for lenders, contracted to 3.39% from 4.03% in the second quarter of 2022. This contraction reflects the impact of higher funding costs amid rising interest rates.
The pressure on Ally’s retail auto lending portfolio is evident. While demand for auto loans remains strong, the company’s second-quarter originations fell to $10.7 billion, down from $13.3 billion a year earlier. The increase in delinquencies and charge-offs reflects a growing number of borrowers struggling to keep up with payments. The company’s loan delinquency rate in the retail auto sector climbed to 3.81% in the second quarter, up from 3.53% in the previous quarter.
The Third Quarter: Challenges Intensify
The trend of rising delinquencies and charge-offs has unfortunately continued into the third quarter. Hutchinson warned in September that delinquencies in the retail auto segment had spiked by 20 basis points in July and August compared to previous forecasts. Net charge-offs, which represent loans unlikely to be repaid, increased by 10 basis points over the same period.
These worsening credit trends are driven by a combination of factors: soaring inflation, a weakening job market, and a more challenging economic environment.
Market Volatility and Ally’s Stock
The mounting credit issues have cast a shadow on Ally’s stock price, which has been volatile in recent weeks. Investors are concerned about the company’s ability to manage loan losses and maintain profitability amid these challenges. The broader economic outlook, including last month’s weaker-than-expected jobs report and ongoing uncertainty regarding the Federal Reserve’s monetary policy, adds to the unease in the financial sector.
Although Ally has not yet revised its earnings guidance, Hutchinson stressed that the company will prioritize capital and expense management as it navigates these difficult conditions.
Key Points for Investors
Ally’s third-quarter earnings report will be closely scrutinized for signs of further deterioration in credit metrics, particularly in light of the worsening delinquency rates disclosed last month. Any adjustments to the company’s forward guidance will be carefully analyzed as a signal of how management plans to mitigate these risks going forward.
How to Invest in Ally Financial
Investors interested in participating in the Ally Financial market can purchase shares through a brokerage account. Numerous trading platforms offer this option, allowing investors to buy fractional shares for more accessible entry points. For example, with Ally Financial currently trading at $35.93, a $100 investment would purchase approximately 2.78 shares.
If you’re interested in taking a contrarian position by betting against Ally, the process is more complex. It typically requires access to an options trading platform or a broker who facilitates short-selling. This involves borrowing shares to sell, hoping to buy them back at a lower price to profit from the decline. Shorting a stock can be a risky strategy, and investors should thoroughly research and understand the associated risks before attempting it.
